Emerging Risks


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This presentation reviews a recent emerging risks survey, including results and how they might be used. The presenter also discusses how an emerging risk strategy is being developed at an existing firm.

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Emerging Risks

  1. 1. May 1, 2009 Developing an Emerging Risk Strategy Session RI5 – Emerging Risks Beverly Barney, FSA, MAAA, CERA, Vice President & Actuary The Prudential Insurance Company of America • 213 Washington Street • Newark, NJ 07102 Tel: (973) 802-8731 • Fax (973) 802-5846 • beverly.barney@prudential.com
  2. 2. Insert Title Copy Here Agenda <ul><li>What are emerging risks? </li></ul><ul><li>Haven’t we been monitoring emerging risks? </li></ul><ul><li>Why do we need a strategy to manage them? </li></ul><ul><li>How do we identify what we don’t know? </li></ul><ul><li>What is everyone else doing? </li></ul><ul><li>What does success look like? </li></ul><ul><li>What are some of the challenges? </li></ul><ul><li>Where are we now? </li></ul>
  3. 3. Insert Title Copy Here What are Emerging Risks? <ul><li>Difficult Concept: </li></ul><ul><ul><li>Webster defines “risk” as “The possibility of loss” </li></ul></ul><ul><ul><li>And “emerging” as “To come into being” </li></ul></ul><ul><ul><li>Is an emerging risk already on our radar screen or unknown? </li></ul></ul><ul><li>Our Definition: </li></ul><ul><ul><li>A condition, situation or trend that could impact the Company’s financial strength, competitive position or reputation within the next 5 years. </li></ul></ul><ul><li>Common Theme: </li></ul><ul><ul><li>Emerging risks involve a high degree of uncertainty because, unlike other risks, they don’t have a track record which can be used to estimate likely probabilities and expected losses. </li></ul></ul>
  4. 4. Insert Title Copy Here Haven’t We Been Monitoring Emerging Risks? <ul><li>Monitoring emerging risks is not new. </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Analyze quarterly trends in mortality, persistency, morbidity. </li></ul></ul><ul><ul><li>Monitor credit risk profile of our investment portfolios. </li></ul></ul><ul><ul><li>Review business unit operating risks. </li></ul></ul><ul><ul><li>Monitor changes in legal and regulatory environment. </li></ul></ul><ul><ul><li>And many more…… </li></ul></ul>
  5. 5. Insert Title Copy Here Why Do We Need a Strategy to Manage Them? <ul><li>Our Objective: </li></ul><ul><ul><li>To establish a forward looking, comprehensive framework to manage emerging risks that could, at some point in the future; impair the Company’s financial strength, competitive position or reputation. </li></ul></ul><ul><ul><li>Achieving this objective would: </li></ul></ul><ul><ul><ul><li>Strengthen the company for our shareholders by controlling downside risk. </li></ul></ul></ul><ul><ul><ul><li>Minimize surprises and volatility. </li></ul></ul></ul><ul><ul><ul><li>Enable early recognition of risks which could impact multiple areas. </li></ul></ul></ul><ul><ul><ul><li>Recognize rating agency considerations. </li></ul></ul></ul>
  6. 6. Insert Title Copy Here How do We Identify What We Don’t Know? <ul><li>Senior Management brainstorming pilot. </li></ul><ul><li>Brainstorming with associates closer to the work. </li></ul><ul><li>Presentations to many internal areas to raise awareness and collect thoughts on emerging risks. </li></ul><ul><li>Advisory Group formed. </li></ul><ul><li>Piloted systematic identification process with one of our businesses. </li></ul>
  7. 7. Insert Title Copy Here What is Everyone Else Doing? <ul><li>Contacted Think Tanks. </li></ul><ul><li>Met with consultants. </li></ul><ul><li>Perform media scan. </li></ul><ul><li>Attend Risk Management conferences and symposiums. </li></ul><ul><li>Joined International Network of Actuarial Risk Managers – including Google sub-group on emerging risks. </li></ul><ul><li>Obtain published surveys and newsletters. </li></ul>
  8. 8. Insert Title Copy Here What Does Success Look Like? <ul><li>We can’t manage what we don’t know. </li></ul><ul><li>What could we do? </li></ul><ul><ul><li>Identify leading indicators to minimize surprises and allow early mitigation. </li></ul></ul><ul><ul><li>Ensure process is in place to collect exposure and impact information across Enterprise quickly. </li></ul></ul><ul><ul><li>Develop process to identify secondary effects. </li></ul></ul><ul><ul><li>Identify key management group to manage through event. </li></ul></ul><ul><ul><li>Explore alternative mitigation techniques. </li></ul></ul><ul><ul><li>Define content and format of reporting. </li></ul></ul><ul><ul><li>Perform after action review. </li></ul></ul>
  9. 9. Insert Title Copy Here What are Some of the Challenges? <ul><li>How do we know we’re looking at the right risks? </li></ul><ul><li>How much time and resources should we invest? </li></ul><ul><li>How do we incorporate this strategy into existing risk management activities? </li></ul><ul><li>Should management of emerging risks be centralized or de-centralized? </li></ul><ul><li>Who should identify and monitor leading indicators; how often? </li></ul><ul><li>When monitoring leading indicators, when should we take action? </li></ul><ul><li>How do we identify and monitor emerging risks without legal liability for foresight? </li></ul><ul><li>How much structure should we put on this process? </li></ul><ul><ul><li>Too much -> ERM is “creating work”. </li></ul></ul><ul><ul><li>Too little -> hard to aggregate. </li></ul></ul><ul><li>We don’t know what we know. </li></ul>
  10. 10. Insert Title Copy Here Where Are We? <ul><li>Brainstorming continuing. </li></ul><ul><li>Advisory Group continues. </li></ul><ul><li>Broadening discussions. </li></ul><ul><li>Working through Risk Officers. </li></ul><ul><ul><li>Annual Report </li></ul></ul><ul><ul><ul><li>Developed and provided Emerging Risk Discussion Guide </li></ul></ul></ul>
  11. 11. Insert Title Copy Here <ul><ul><ul><li>Questions and Answers </li></ul></ul></ul>